Households may save for a variety of reasons: as a precaution against emergencies or periods of unemployment, to accumulate down payments on homes and other large purchases, to finance education for themselves and their children, to provide bequests, and to build up assets that will produce income in retirement. As incomes and life expectancies have risen substantially over the past century, people have tended to stop working earlier and spend longer periods in retirement than they did in the past. That trend has increased the relative importance of retirement income as a motivation for saving as well as the importance of income-security programs for the elderly.

As the baby-boom generation grows older, the number of people in the United States ages 65 and over is expected to roughly double by 2030. Moreover, that age group is forecast to grow from about 13 percent of the total population in 2000 to 20 percent in 2030 and to remain above 20 percent for at least several decades thereafter.(1) With life expectancies continuing to rise, typical boomers are projected to live about two years longer than their parents did (see Figure 1) and thus could spend more time in retirement. Meanwhile, the labor force is expected to grow much more slowly than the population of retirees, resulting in many fewer workers per retiree. Whereas there were 4.8 people ages 20 to 64 in 2000 for each person age 65 or older, that number is expected to decline to around 2.9 by 2030

Source: Congressional Budget Office based on Social Security Administration, The 2003 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds (March 17, 2003), p. 86, available at www.ssa.gov/OACT/TR/TR03/tr03.pdf.

Source: Congressional Budget Office based on Social Security Administration, The 2003 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds (March 17, 2003), p. 82, available at www.ssa.gov/OACT/TR/TR03/tr03.pdf. (The values shown here are the inverses of the dependency ratios given in that report.)

To the extent that baby boomers intend to provide for their own retirement, they must decide how much to save during their working years and how to invest those savings to provide income in the future. But boomers need not set aside enough resources to cover all of their anticipated needs in retirement. Some portion of those needs is likely to be covered by pensions and, more importantly, by government benefits.(2)

Government Retirement and Health Programs

The Social Security, Medicare, and Medicaid programs partially replace retirees' working-age incomes and finance a large share of their health care expenses. Those programs are mainly funded on a pay-as-you-go basis through taxes on workers' wages and salaries. In the past 40 years, spending for Social Security and Medicare (the two programs that focus most heavily on the elderly) has risen from 2.5 percent of the nation's gross domestic product to 6.9 percent.

Today's retirees are heavily dependent on benefits from those programs. Overall, Social Security payments make up about 40 percent of the total income of people ages 65 and over. However, about two-thirds of those people receive at least half of their income from Social Security, and one-third receive at least 90 percent. Annual Social Security benefits are projected to average $10,740 this year.(3) According to one estimate, a two-earner couple who retired in 2000 at age 65 (one earning an average wage and the other a low wage) will receive a total of $570,000 in Social Security and Medicare benefits over their lifetime.(4) Yet even with benefits of that size, about 10 percent of the elderly fall below the official poverty level.(5)

If current trends persist, Social Security benefits will continue to rise along with wages, and expenditures per elderly Medicare or Medicaid beneficiary will also keep growing. Thus, baby-boomer households are expected--under current law--to receive a significant portion of their retirement income from Social Security and to have a large share of their medical and long-term care expenses paid by Medicare and Medicaid. If the two-earner couple described above retires at age 65 in 2030, they will receive an estimated total of $960,000 in Social Security and Medicare benefits during their lifetime, under current law.(6)

Present trends are unlikely to persist indefinitely, however, because total payments to retirees are expected to grow much faster under current law than either the total incomes of workers who pay Social Security and Medicare taxes or the revenues earmarked for those programs.(7) That widening gap will place increasing stress on both programs. Narrowing the gap could involve slowing the future growth of benefits.

Because the existence of government benefits plays such an important role in households' future well-being, it probably influences those households' propensity to save for retirement. A 1998 CBO study concluded that "each dollar of Social Security wealth reduces private wealth by between zero and 50 cents."(8) At the same time, however, looming budgetary pressures leave current workers increasingly uncertain about how secure their future benefits are. A recent study of expectations about the future of Social Security found that many people question whether they will receive the payments prescribed under current law.(9) That uncertainty could induce them to increase their saving to offset possible reductions in future benefits. (However, the study did not provide any evidence that people who are less confident about receiving Social Security tend to save more.)

If changes to the Social Security program were made unexpectedly, households nearing retirement would be less well prepared. But given sufficient time to adjust, households could increase their work effort and saving to offset such changes. The extent to which baby boomers are providing for their own retirement--and have time to react to policy changes--is thus an important consideration in evaluating proposals to reform the Social Security and Medicare programs.(10)